Grant Williams: Rhona O’Connell, Thomson Reuters
GFMS head of metals research and strategy.
Rhona O’Connell: Thank you.
We’re going to talk about precious metals
today, I hope.
And I want to start talking about things like
the history and philosophy of gold, rather
than the price.
And then we’ll get round, perhaps, to some
supply and demand dynamics.
But perhaps you could talk a little bit about
Because it’s a long and involved background
with the precious metals markets, and talk
about the gold survey would be fantastic.
What if we kick off with the gold survey?
Let’s do that.
It’s our 50th anniversary this year.
That’s quite something.
It might look like it, but I have not been
working on it for 50 years.
It feels like it sometimes.
But essentially, the gold survey is a pretty
hefty tome– lots of words, lots of charts,
and lots and lots of numbers.
And it’s been regarded as the bible of the
gold industry for probably something like
35 years, maybe even 40.
Because it’s all based on primary research.
So there’s a lot of travel, a lot of talking
to individuals, right the way through the
market from central bankers, to jewelers,
to smugglers, to miners, to bankers, to refiners,
you name it.
And as a result of that, we are able to pull
together all the series of numbers that relate
to supply, to demand, in all their different
guises and trade flows, and so on and so forth.
But the idea of being able to pull together
the supply-demand balance and structure of
the market, which gives us the background
and the springboard from which to be able
to do the sexier analysis, which revolves
around investment, frankly.
So the question is gold a commodity, is it
I personally, think it’s both because it’s
dug up, and it’s turned into things, but it’s
also a currency.
And by virtue of its role as a currency when
the dollar was on the gold standard, this
was the birth of the gold survey.
Typically speaking, if you’re running a gold
mining company or any other mine for that
matter, and you’re working at depth, then
the time from discovery of a decent deposit
through to coming on stream, is anything up
to 10 years.
Dollar gold standard, $35 per ounce, 1934
onwards—1967 – Consolidated Gold Fields,
which at that point, was the world’s second
largest gold mining company behind Anglo American,
wanted to do decent sensible 10-year planning.
And it was quite clear that the financial
structure of the gold market and the dollar
market, for that matter, was coming under
Because there was very strong demand from
gold from all over the place, but not least
because of the Vietnam War, which was outstripping
mine supply by a very considerable margin.
And in order to keep the dollar price at $35
per ounce, central banks, but basically the
United States, were throwing gold into the
market to maintain the price.
So Goldfields thought about this and reckoned
that something was going to have to give,
and it was going to give sooner rather than
So in an effort to try and identify when the
dollar gold link was going to have to be broken,
and also to try and put some kind of target
level on the price, they went into the market,
spoke to the movers and shakers– and at that
point, in particular, it was the central banks-
– and came up with their first gold survey,
which was an in-house document.
And they concluded that the price was probably
going to be severed from the dollar in around
And in fact, it was ’71.
A little early– yeah.
It caused a bit of a furor at the time because
everybody who had been in the market for as
long as they were alive was used to $35 gold.
And the thought of gold going to $80 was anathema
to the spirit.
But they were proved right, and of course,
we’ve subsequently been up close to $1,900
or very nearly $2,000, subsequently.
When you do the survey, and you say you talk
to all these people, and you’ve built that
trust over 50 years, that people will talk
openly and candidly to you, in order to get
such a great picture of the market– now whose
answers do you trust more– the central bankers
or the smugglers?
I’m just interested because one of them has
no reason to obfuscate whatsoever– the smugglers.
And the central banks– Well, some of them
But I think if you get this idea of anonymity,
then perhaps, they’re probably a little bit
more comfortable with it than central bankers
because that’s a much bigger game.
That the central bank part of this equation,
it seems to me, is a much bigger game.
Because they have everything to potentially
lose if the gold price is a reflection of
the currency they produce.
It’s not so much a question of trust as interpretation.
Because a central banker will not dissemble
if he doesn’t want you know something.
He just won’t tell you.
Smugglers, probably pretty similar, actually.
It’s all a question of interpreting flows
It’s partly science, but it’s more an art.
For example– and I first worked on the gold
survey when I was a baby analyst back in the
You can pick up elements of information which
don’t square with one another.
So if you’re talking about something in the
demand sector, let’s say, it’s jewelry or
electronics manufacture for example– and
somebody gives you an idea of an expanding
market taken in isolation, and someone else,
perhaps in the same country, is talking about
a contracting market– you’ve got to decide
whether you’re talking about people’s market
share changing or whether there’s something
funny going on, and maybe somebody is exporting,
and so on and so forth.
And I remember– I was very young and very
And obviously, they only trusted me to do
a certain amount.
So I had Northwest Europe as part of my beat.
And I remember sitting on a train somewhere
in Norway, going frantic trying to identify
where 50 kilos of scrap had gone because it
was just so complicated, or at least, it was
for me, at that point.
So there’s all these different elements in
And the reason why we are trusted to the extent
that we are is because of our continuity.
And here, I have to raise my hat to a gentleman
called Tim Green.
And without him, I wouldn’t have started my
career the way I did.
He was a journalist, originally, and he’d
done some work on smuggling and gold had been
And he became involved with goldfields in
the late 1960s.
And he has been a constant right the way through
to when he finally retired.
He spent years trying to retire, and we wouldn’t
But particularly, for people like central
banks or Swiss refiners– who, by definition,
they’re the fulcrum of the market, and that’s
a very, very discreet market.
So in order to be able to go in and see these
people, the fact that we had Tim, who was
keeping those doors open all the way through
was absolutely invaluable.
Well, we’ll come on to supply and demand
as I’m interested in how you see the market.
But what I want to start with, really, is
the philosophical side.
And you and I chatted a little bit about this
Because I think there’s this question in a
lot of people’s minds– why gold?
Why is gold money?
It’s just another metal.
And so I think– for the people watching this
that perhaps have question in mind, and I’m
sure there’s a lot of them– let’s go back,
all the way back.
Because I know you love the history side of
Just talk us through why gold, and the beginnings
and the origins of it is money.
Well, It’s human nature as much as anything
There’s only two metals, which in the elemental
form are not white, silver, or grey.
One is gold, the other one is copper.
Gold is malleable and ductile, as is copper.
But it’s also a noble metal, it doesn’t tarnish,
it doesn’t oxidize, and it’s beautiful.
And it was initially discovered, pretty much
on the surface or in alluvial beds in the
rivers, in the area known as Nubia, which
is now Sudan, southern Egypt.
It’s actually mentioned in Genesis.
And because it was relatively easy to find,
and once you’ve touched it, you just fall
in love with it.
Almost by definition, in and of itself, it
became a currency.
So the old term, by dint of ancient usage
is probably more appropriate for gold than
it is for anything else.
So going all the way back 3,000 years, it
started use as a currency.
The price was broadly steady, and then production
started to pick up.
Gold and silver, incidentally, were pretty
much at parity price-wise in those days.
Production particularly picked up in the couple
of centuries either side of when we went from
BC to AD, and particularly over in Europe.
And that’s tied up with the Romans working
And that was part of the reasons why they
did work westwards.
And from then on, it stabilized, then it picked
up again, and production really expanded in
the 19th century.
But all the way through– can’t say anything
about the dark ages, because we don’t know
But all the way through that intervening period
of history, gold had played a role as a currency.
Now Paul Volcker, I believe it was, made the
comment way back 30-odd years or so ago, which
has now become something of a truism, which
is that it’s the only non-fiat currency, i.e.,
it hasn’t got a central bank’s chop printed
on it, and therefore, it’s no one else’s liability.
But that brings us into the professional world.
Going back further in time, because it had
become accepted as an international currency-
– people living in areas of risk, whether
politically, which was most places in those
days– would hold it because it was portable,
and they could take it with them.
And I’ve seen wafers of gold, thin as cigarette
paper, which people would roll up and put
into the hems of Middle Eastern garments if
they needed to run for it.
Equally, there are small bars which you can
And when you’re in another country, there
you have your currency.
It’s no coincidence that sailors on the open
seas wore gold earrings.
Because that was what they knew would get
them out of trouble if they were washed up
somewhere which they didn’t like very much.
It’s funny you said earlier on, when you talk
about, when you touch gold, you fall in love
I think this is, to me, it’s a crucial thing
Because people that haven’t held gold don’t
understand that dynamic.
They don’t understand that emotional connection
that people have to it.
And they, therefore, write people off and
say, oh, fine, you just love gold.
You don’t think about this clearly, you just
love it for whatever reason.
And I was filming recently in a refinery in
And one of the camera guys, he’d never seen
gold, he’d never touched gold.
And there was $10 million of gold sitting
on a trolley, no bigger than this.
You can’t help but stare at it.
And he said to the guy– the exchange was
kind of funny– can I touch it?
And the guy said, yeah, sure.
So picked up a little kilo bar, and he– –beautiful
But he handed it to this guy.
And his face– he just went– his mouth, it
And he’s like, wow.
The smoothness, the warmth– Yeah.
There’s something about it.
–the texture, the density– Yeah.
And you talk about this stuff, and people–
I’m sure people are looking at us going, oh
God, here they go.
But it’s funny because that connection, it’s
not just me, and you, and other guys, and
the camera guy.
This goes back thousands and thousands of
So the argument about why is gold money?
It is redundant.
It doesn’t matter.
It just is, and there’s nothing you can do
to change that.
So you kind of need to move past that and
just talk about it as currency, and inflation
hedge, whatever it is to you.
And there are different people who look at
it as different ways.
So when you talk about the different ways
it’s viewed, how do you think of it?
Do you think it as a currency first and foremost,
or a hedge, or a…
I think of it as a risk hedge.
–a risk hedge.
–in every respect.
And again, this goes right the way back to
ancient uses, because you take it with you,
because it’s a portable currency, blah, blah,
Now it’s a hedge against risk for people again,
if they need to leave the country or because
they’re concerned about geopolitical risk
That’s at the retail level.
And then right the way through to professional
investment, there’s been an awful lot of quantitative
work done on it, where it shows that, against
other asset classes, often the vast majority
of other asset classes, it either has a very
low positive or more likely, a negative, and
on odd occasions, a zero correlation.
So from a professional investment point of
view, it’s very good for expanding the efficient
frontier, i.e., you raise your reward for
the same level of risk or vice versa.
So right the way across the whole spectrum
it acts as a hedge against risk.
In terms of gold as a currency, how do you
What prism do you like to look through if
people want to talk to you about gold as a
I think that, basically– well, most people
think of it as a dollar hedge because it’s
done always in dollars, obviously.
So from a professional investment standpoint,
that would have to be how you look at it.
From the point of view of looking at it as
a currency, we go back to what I was saying
before about depending on where you are in
If you need to barter, then that’s what you
would use in an ideal world because people
will trust it.
And the other one is always the inflation
Everyone says that this is– and a lot of
people think it’s purely and simply an inflation
They look at it, and they say it doesn’t work
as an inflation hedge.
That’s because there’s no inflation.
Well, no, which is exactly the point I wanted
to make. –in most places.
We’ve lived through this era since the gold
price peaked in 1980, of essentially falling
It has just fallen for 35 years.
It’s a problem because it has fallen too far,
So I think that idea of gold as inflation
hedge, whilst those people are right, it hasn’t
really been one, because it hasn’t had to
You can get that sense that if central bankers
are successful in their stated aim of generating
2% inflation, we will see that roll for gold
return rather quickly, I would think.
Are you seeing anything in market dynamics
that suggest people are moving into it because
they do see inflation coming, or are we not
quite there yet?
Not quite yet.
At the moment, it’s still Fed-watching.
It has been Fed-watching for donkey’s years.
And the interest rate cycle has been one of
the key elements that has informed analysis
over the last two, three years or so.
Not so much now, because the uncertainty has
fallen away, or very largely.
But certainly a couple of years ago when nobody
quite knew how many interest rate hikes to
expect in the States, that was one of the
reasons why people were sitting on their hands
with respect to just about everything, to
be perfectly honest, not just gold.
Well, let’s get into the supply and demand
Because that’s a lot of what this survey is
Because obviously, they’re the factors that
will determine the price, ultimately, I guess.
So let’s talk a little bit about what you
found this year when you went through, the
interesting points that you took out of it,
and perhaps the changes you’ve seen between
this year and last, and then perhaps any that
you’ve seen have been evolving over the last
five or six years and look like they might
be the trends to follow as we go forward.
One particularly interesting change over the
past year or so has been within the balance
of jewelry demand and investment demand.
Now I’m going to have to come back to this
one because it’s a two or three pronged argument.
Jewelry in the Western Hemisphere is not investment,
Jewelry, basically, anywhere East of Suez
is predominately investment.
I’ll give you an example.
This beauty and the rings I’m wearing– You
might hold it up a bit.
Don’t know whether that’s visible.
But that is bright yellow.
And that is four nines, i.e., 24- karat gold,
as is the ring.
Now you probably can’t see from here, but
if you compare that finger with that finger–
And the dilution there is copper, predominately.
So quick masterclass on jewelry.
Western Europe, predominately 14-karat, United
Kingdom, I’m ashamed to say, generally 9,
United States, somewhere between the two.
So if, as somebody in the United Kingdom,
you’re buying a plain piece at 9-karat gold
jewelry, you will pay anything between 4 and
6 times the intrinsic value of the gold.
Because 9-karat gold jewelry is over 60% copper
and should really be called goldcontaining
And then you’ve got wholesale, retail, distribution,
VAT, retailer sunk costs, et cetera, et cetera,
So when you buy that piece of kit, you’re
never going to be able to sell it back for
the value of the contained gold.
This, by contrast– and I was actually in
Hong Kong last week, and one of the links
was broken, so I did actually do a spot of
scrap trading– you pay by weight with a specific
So when you go into somewhere in Hong Kong
or anywhere in India, China– Dubai is a great
place– –Southeast Asia.
They will have the weight of the piece.
And they will weigh it for you, again, just
to prove it to you in front of you.
Then they’ll add the fabrication charge, and
you don’t really pay very much over the top
So if you want to sell it back, you’re going
to get pretty much what you paid for it, in
terms of weight, and according to the prevailing
And it’s priced on the London previous afternoon
So what you see really is what you get.
It’s an incredibly low-margin business actually,
the gold business.
So jewelry over there– investment.
And that’s how it works, basically.
So having said that there’s been a big shift
between jewelry and investment, I must put
that caveat in because maybe 50% of jewelry,
probably a little bit more actually, is based
on weight, as opposed to sticker prices.
ETF investment is predominantly professional,
but there’s a degree of private investment
in there as well.
So it’s not cut and dry between the two.
But it is, nonetheless, interesting that we
had a massive drop in jewelry demand last
year– predominantly because India and China
had, for different reasons, very weak years–
but a big resurgence in exchange-traded fund
So if we actually add the two together plus
bars and coins, what we call our identifiable
investment component, plus jewelry– you add
those two together, they’ve combined, they
were actually higher last year than they were
the year before.
It was just, there was a big change in the
product mix, as it were.
So what this suggests is that, after three
years of selling out of exchange-traded funds,
over 1,100 tons over the course of ’13, ’14,
’15, we had uptake of over 500 tons in ETFs
last year, whereas jewelry and bars were down.
Now jewelry and bars were down partly for
economic reasons, rather than geopolitical.
But the ETF investment was coming back in
because of geopolitical risk, as much as anything
And as you were saying earlier, there is a
possibility that people are looking further
out because there is a lot of liquidity in
the financial system.
And once the major economies are in lockstep
once again, there is a risk of inflation.
So long-term investors will be looking at
So you said India and China, for different
reasons, had bad years.
So just expand on that a little bit, if you
Interesting markets, both of them.
Any self-respecting gold analyst needs to
be an amateur meteorologist.
At Thomson Reuters, we’re lucky because we’ve
got Lanworth, who are a team of agricultural
And they’re wonderful.
They’re mathematicians and physicists and
And they have actually forecast the outcome
of the Indian monsoon season more accurately
for the past four years than the Indian government
40% of the Indian population is in the agriculture
industry, and about 60% is reliant on it.
So that’s 40 as a subset of 60, not the total
coming to 100.
And they don’t trust the banking system.
So when there is a good harvest, and there
is disposable income, then that informs the
buying from the Indian farmers, as far as
gold is concerned.
And of course, gold has religious significance
And when an Indian girl marries, she takes
her dowry, and that goes to the husband apart
from her gold.
Very important part of Indian society.
Last year and the year before the monsoons
The expectation was for a better one last
And it was all right, but it wasn’t wonderful.
The expectation for this year is better.
And the Indian government hadn’t raised what
they called the minimum support price for
the crops by very much.
So there wasn’t a lot of money available for
There had also been some problems with, in
2015, the imposition by the government of
what they call the 80:20 rule, which dislocated
the market for a while.
And what that was all about was that the banks
and the star people who were bringing metal
in, were required to ring fence 20% of their
imports, do something to add value, which
was basically simple jewelry fabrication for
And that dislocated the market for a while.
And now we are waiting for the general sales
So all those different things have meant that
Indian demand has been low last year.
And it was a bit better the year before, but
it’s still on a downward path.
So what we’ve got, and this is looking forward
if you like, is quite a lot of pent up demand.
So that, as and when things get better, and
if we have a good monsoon season this year,
you will probably find that there will be
pretty strong buying starting to come back
out of India.
It’s not really there yet though.
And what’s the cash ban– what effect has
that had on the gold market?
Because a lot of people had presumed that
it would either be very bullish or very bearish
for the gold demand, and it doesn’t seem to
have had a material effect so far?
This is where we turn it from a science into
Generally speaking, the underlying physical
demand, or lack thereof in the metal itself,
will be a contributory factor to what’s happening
to the price, but it very, very rarely be
a sole driver.
So that, if the price is falling and physical
demand starts to come in, it may well help
to cushion it.
But strong physical demand, in and of itself,
is rarely enough to push a price higher.
That’s where you start needing the hot money
and the professional investors.
So that’s when you have to start looking at
currencies, and equity markets, and bonds,
and so on and so forth.
So that’s India dealt with, more or less.
India, and China, between them, take up about
50% of the world’s jewelry demand in any one
China is now the world’s largest consumer
if you include the industrial use and so forth,
whereas India is still very much based on
It has got a lower electronics sector.
China’s issues actually go right the way back
Financial crisis 2008-2009– heavy ETF purchases
in the West.
Period of relative stability.
2013, perception takes hold that the financial
crisis is easing, gold has done its job, so
some say it all started out at the ETFs.
In fact, they hemorrhaged, in April particularly,
and then also June was strong, but not quite
as dramatic as April was.
We lost a phenomenal amount of metal coming
out of the ETFs.
Over the year, as a whole, it was 888 tons,
which compares with about 3,000 tons worth
of mine production, to give you a sense of
Arguably, the rate-determining step, at the
speed with which that metal could go East.
Because that’s where it all went, was the
capacity of the Swiss refiners.
Because ETF metal, contrary to some conspiracy
theorists, is allocated, and you can get the
bar list, and you can see the numbers.
And they’re generally London Good Delivery
bars, which are nine-nines five.
That’s not acceptable in the Far East.
They want four nines.
So the Swiss refiners were working flat out,
turning these LGD bars into four nines bars,
anything from a gram up to a kilo, basically.
And it was going out predominantly into China.
And they overbought, deliberately in some
cases, because the price was coming plummeting
So quite a lot of the gold that– it was known
as the Chinese aunties, the women who run
the families, they were buying ahead of time.
They were buying for 2014 purchases, as well
So that automatically pulls the rug from under
2014 a little bit.
And the banks were a little bit cheeky.
Chinese premier were running higher as against
Loco London, as you might expect, given what
was going on.
So some of the banks muscled in on this and
took metal in, with the expectation of capturing
Didn’t necessarily work out because demand
had been sated.
So they were left with a lot of metal on their
So that has also helped to undermine what’s
been going on.
So that’s 2014 and 2015, essentially.
2015 was made worse by the vagaries of the
Equities markets plummeting, but people were
locked in because prices were moving so quickly,
so they couldn’t get it out and buy the gold
that they would have wanted as a hedge against
risk for the future.
And last year, it has been an economic issue.
It has predominantly been jewelry.
There was actually a slight increase in bars
because of concern about the destination of
So we’ve had a combination of investment,
over-investment, and then the economy slowing
down, and on the side, concerns about the
So again there’s signs of a little bit of
But until the Chinese economy has been stabilized,
then that’s going to remain under a little
bit of pressure as well.
This idea of the gold moving from West to
East is something that a lot of people talk
about, but again, more from a philosophical
standpoint, in that they understand that,
to your earlier point, there’s a cultural
affinity for gold.
And it’s used in a transactional way, and
it’s also used as gifts for weddings, and
christenings, and all those kind of things.
So when people talk about the gold moving
from West to East, it’s kind of a big blurry
thing that people kind of go, well– Can you
put some perspective around the kind of flows
we’re seeing, and what that might mean at
a point in time where– let’s say we have
another ’08-style event, where there is a
desire in the West to own gold again, like
In the interim, what has that shift of physical
metal out to Asia meant, in terms of what
might happen, in terms of quantum if we see
The rule of thumb has always been that gold
will flow from West to East, and it won’t
come back again.
It did last year.
Not a huge amount out of China, necessarily,
but certainly, if we look at South Asia and
the Middle East.
There’s a lovely infographic in the middle
of the survey, which has got lots and lots
of flags in it.
And it’s Swiss trade.
So on the one side, you’ve got the import
sources of metal into Switzerland.
And on the other side, you’ve got the export
Now in 2015, a lot of the material that was
going out of Switzerland was going into countries
that genuinely wanted it.
But this year, if you look at the sources
for imports, one of the biggest flags is Dubai.
Because material has been coming back to Dubai,
and they haven’t been able to ship it back
into India, because India hasn’t wanted it
So it has come back to Switzerland.
And if you look at the exports, there’s still
a reasonable amount going out into China,
very little going out into Hong Kong, but
masses going back into the UK.
So what those two tell us, between us, last
year, is that material has been coming back
out of some of the traditional consuming regions,
coming back into Switzerland for re-refining,
maybe from jewelry into bullion, whatever,
and a lot of it has come back into London
vaults because there’s nowhere else for it
Is that a demand phenomenon, i.e.– That’s
a loss of demand, yeah.
It’s a loss of demand.
A loss of demand in Asia?
And an increasing in ETF demand, or just that’s
the natural flow of these things, once the
demand Up to a point, yes.
And some of it is just sitting in vaults on
banks’ books waiting, to be taken off.
So right now, there’s no tightness in the
The supply and demand equilibrium is fine.
So when you look through that report, what
stands out to you?
Because every year, I’m sure there are certain
data points that make you– ah, this is interesting.
There’s a shift here.
What does it mean?
What, when you went through the report this
year, were the things that jumped out at you?
This particular year is the one we’ve just
been talking about, really.
But there’s also signs that central bank purchasing
is on the wane.
Going to remain positive, we think.
And Russia and China are the two major purchasers.
And the stability of the US economy and actually
the strength of the dollar means that there’s
less pressure on some emerging markets.
So there’s less risk hedging coming in from
the central bankers.
But we still expect them to remain on the
demand side of the market.
The days of heavy selling have gone.
The Chinese gold market, everyone’s got a
number in their heads about how much gold
the Chinese really own.
And there’s all these conspiracy theories
about tens of thousands of tons stacked up
in PLA warehouses everywhere.
And they hide it, and they try and obfuscate
the truth, so no one really knows.
But really, they’ve got 25,000 tons instead
In your research, what kind of picture can
you paint with Chinese official gold holdings.
Well, obviously, it’s a sensitive one.
They’re not particularly forthcoming.
The changes that they made over the last 18
months or so have been very helpful in the
sense that they’re now reporting– well, they
were until very recently, on a monthly basis,
what they’ve done on a net basis, obviously.
And we suspect that that was because of the
desire to get close to the IMF and become
involved in the SDR, and so on, and so forth.
So they’re more open than they were.
There hasn’t been anything reported recently.
Whether that means they’re not buying any
is hard to say because it is perfectly possible,
to use an LME term, the white lining mechanism
and have it in a bonded warehouse, but not
in the central bank vaults, for example.
But just explain that to people, because there
are people that don’t understand how that
What, white lining?
Because it’s an important point to make.
LME warehouse, on-warrant, warrant off-warrant.
If something is off-warrant, it means that
you’re ready to take it out of the warehouse
or you’ve put it in the warehouse, but you
haven’t yet registered it, so it doesn’t show
up in the LME warehouse stocks numbers.
Once it’s on-warrant– and it used to be,
literally, moving it across a white line.
I don’t know whether that’s still the same
case, but it’s a term that stuck– it becomes
a registered part of the stocks, and it shows
up in the numbers.
So anyways, I’m sorry.
We’ll get back to the Chinese.
So it is perfectly possible that that’s what
We can’t put hand on heart and say we know,
because we don’t.
But we can make as best estimate as we possibly
can on the basis of the people that we talk
to who are there.
What is also interesting though, and what
is becoming an improved area of transparency
is the Shanghai Gold Exchange.
You mentioned conspiracy theorists.
There are probably more conspiracy theorists
per ounce of gold produced in the world than
there are about anything else in the financial
But that’s a different story.
The Shanghai Gold Exchange is very important.
It’s the only real official channel through
which gold could be imported and bought without
VAT within the country.
But it’s not just a repository for imports
and a source for producing metal for demand.
Things get rolled over, time after time.
There will be scrap material that comes back.
There is material that has come back from
jewelers, for example, which is in-house scrap,
if you like, because they haven’t sold it
to the remelting to reduce their inventories,
and this kind of thing.
There’s also a degree of round-tripping going
on with Hong Kong, which is all to do with
arbitrage against interest rates and so forth.
So more often than not, the numbers that the
Shanghai Gold Exchange produce for their annual
turnover, or their monthly turnover for that
matter, are overstating what some people think
Because they are not a linear proxy for demand.
There are all sorts of things going on.
And we have an analyst in Hong Kong who has
really gone into the bowels of this.
And if anybody wants to read about that in
the survey, there are three or four pages
He really knows what he’s talking about.
And he’s identified four or five different
elements, which contributes to SGE turnover.
So let’s talk about the rise of the Shanghai
Exchange because it’s a fairly new phenomenon.
And it has very, very quickly become, I would
argue, the most important exchange, perhaps
even more so than London now, and some of
that is because of the opacity that surrounds
When you look at the amount of physical gold
that does go through that market, it’s important.
So perhaps you could talk about why it was
established and what’s happened in the three
years, since it really came on line.
But this is essentially China recognizing
its importance in the market and wanting to
put some structure around it, simple as that.
But what is their endgame?
Do they want to supersede the LBMA?
Do you think that’s the goal?
May we live in interesting times.
There certainly has been a push, there still
is a push, for a local renminbi fixing price.
And I wouldn’t be surprised if that happens.
There’s a healthy dynamic between Loco London
and Shanghai gold.
It’s not a strict arbitrage, because Loco
London, typically, is two nines five, and
Shanghai gold is four nines.
And this actually opens up a whole new story
about whether the liquidity in the market
is becoming fractured because there are too
many exchanges competing for business.
We can go on to that if you like.
To say that they want overall supremacy, I
I’m not inside their heads, but we all know
what politicians, what kind of aspirations
And certainly, I’ve heard Chinese bankers
saying that they want this local fix because
they are such an important part of the market,
and presumably, they think that they should
be able to fix against their own benchmark,
which is fair enough.
Well this idea of a yuan-denominated contract
is also important.
It has much wider implications.
And we’ve spoken on this on Real Vision before.
And I’ve given presentations about this, just
this idea that, with a controlled currency,
there is the makings here of an outlet through
the gold contract that is tied up with oil.
And you can convert renminbi into gold, gold
into perhaps dollars, or gold into oil, and
then oil into dollars.
So there’s a way that some dots could be joined
that would enable the Chinese yuan to become
Is that something that is on people’s minds
Or is this, perhaps like me and a friend of
mine Luke Gromen putting dots together that
aren’t really there yet?
I think you’re joining the dots, frankly.
There certainly is a push towards internationalization
I always struggle with that word as well.
I blame my teeth.
The joining of the SDR is an important part
It is possible, actually– going back to what
we were saying about central bank purchases,
or the lack of publication thereof recently–
it is possible that this may be part of the
management of the yuan in order to prevent
too much depreciation.
I don’t know.
The numbers involved suggest to me that they’re
probably too small to be of significance.
But it’s a possibility.
Well, you mentioned, we did we could expand
on this liquidity issue.
I’d love to explore that a little bit further.
Just explain what all these exchanges competing–
particularly, as they are competing for different
standard delivery forms.
What is that doing to liquidity?
If you go back three or four years or so ago,
Loco London was typically 90% of the world’s
So Loco London is essentially anything that
will be cleared through the London clearing
It doesn’t actually necessarily have to be
It will be moved on paper between the banks
who are doing the necessary transactions.
Shifts in importance of different physical
areas in the world, and they’re coming back
to China, predominantly, means that we’re
now only about 70% of the total OTC.
So question, where is that liquidity going?
A lot of it is going towards the Far East.
But then we’ve got—I suppose the Shanghai
Gold Exchange, which is physical, and the
most active of which is the T+D contract,
which is physically deliverable against.
The others tend to be more rolling contracts.
You’ve got the Shanghai Futures Exchange,
which is now turning over very high volumes.
And you can arbitrage between SHFE and COMEX
and London in copper, you should be able to
do it between SHFE and COMEX and gold, really.
But you have to build something in for the
nine nines five against four nines differential.
Then you’ve got Singapore looking to get in
on the act.
They’ve certainly got a vault now.
Whether they’re going to open an exchange
is probably up for debate.
You’ve got Mumbai, you’ve got Ahmedabad, you’ve
got all the activity in Dubai and so forth.
So there have been questions in that part
of the market over the last two or three years
as to whether all these new exchanges or new
contracts are going to compete against each
other, with the result that they don’t work
for the common good.
Then in London we’ve got the OTC market.
We’ve got the ICE and CME, and now the LME,
which is actually running late– but that’s
not the LME’s fault– the LME is due to go
live in August.
One of the new contracts, which is a CME,
which went live in January, that hasn’t yet
So the LME is actually being very clever.
Because they’ve got a commitment to liquidity
from the banks that are signed up.
It’s one of these wanting to be first to be
People want to see the liquidity in the market
before they’ll join it, which is always a
So we have to wait and see, basically.
So I want to talk about the size of the gold
market because people have an idea, and a
lot of people think it’s a tiny, tiny market.
It’s certainly bigger than most people think
it is, a lot bigger than most people think
So I’d love to get some sense of how big that
market is in traded gold versus the actual
gold they’re pulling out of the ground.
Obviously, it is tiny by comparison with treasuries
or bonds or whatever.
But it’s very deep.
And a lot a lot of the depth is due to normal
buying and selling.
But obviously, there’s going to be forwards
and hedging and so on in there.
But the way to quantify it is to look at the
LBMA transfer figures, which is freely available
on the LBMA website.
You then have to adjust for the fact that
those transfer figures are smaller than overall
volumes because they don’t include material
that’s been netted off during the day.
And there is overnight credit to take into
account, and so on and so forth.
So generally speaking, rule of thumb is that
you multiply the LBMA transfers by three.
Then you adjust for the fact that Loco London
is about 70% of global.
And when you gross all that up, for last year,
we get a number of the order of 19 billion
A million ounces are 31 tons.
So 19 billion is about it’s 200,000 tons worth,
so almost 600,000 tons.
So it’s 200 times mined supply of last year.
So 200 times the amount pulled out of the
ground is traded every year.
And so what effect does that have on the price,
when we get tightness in mined supply.
Does it not really matter to that?
That’s still gong to trade anyway?
Obviously, premiums and discounts are going
to move around.
Because part of the survey, obviously, is
a big look at the mined supply.
And we know that, over time, it’s getting
harder to get gold out of the ground.
It’s getting more expensive to pull gold out
of the ground.
So what are you seeing in the supply side
of this dynamic?
And how does that, you think, affect your
If anything, it’s what overall trading does
to the mined supply, as much as anything else.
This is where we cross the great divide between
the commodity element and the investment concurrency
Actually, last year, in fact, costs fell a
That was a function of the fact that most
production is in non-US denominated currencies,
apart from the US, of course, that speaks
So if you take the largest 10 producers and
put a weighted basket cost on what they did
last year, that actually came down by something
And crude came down by 31%.
So last year, the all-in sustaining cost,
which includes capital expenditure and so
forth, was of the order of $820 per ounce.
And again, in the survey, there are cost curves
in there comparing last year with the year
before and where the average price was and
So you can gauge how much of the industry
was underwater, which is actually not a huge
amount, by comparison with platinum, which
is really struggling.
So what has happened is that the miners, arguably
shortsighted, in period of ’11 to ’13 when
the price was nice and high, rather than bolstering
their balance sheets, the money went through
into dividends or whatever it might have been.
And now prices have come down, although the
margins are still there, they’re not big enough
for the miners to be able to enter into greenfield
or brownfield expenditure.
And in some cases, sustaining capital expenditure
is under threat as well.
So we’re actually starting to look at a declining
mine profile from here onwards.
So that’s not going to have too much effect
on the price, except if you get a big boy
like a Barrick turning the lights off, then
that’s going to affect sentiment.
So supply is tight enough that you get one
major producer doing that, and that causes
It would be an effect on sentiment, rather
than the actual physical flows.
Because people might think, whoa, if someone
like that has got to start tightening their
belts, then who else is going to do it?
It’s actually not really very likely, but
it is what it does to how people feel.
So over the years that you’ve been involved
in this report, which is incredibly thorough–
when you look at the miners, they have this
reputation of being terrible managers of shareholder
capital, some worse than others, and some
of the small ones actually decent– but what
changes have you seen in the way– have they
Have they not learned lessons?
If so, are they ever going to learn lessons?
Because there will be people out there that
want to invest in the mining companies.
And management is such a crucial– to me,
it’s the place you start with a mine.
I look at the management before I even look
at the resource, frankly to understand that
Location, location, location, management,
I have been told– I have not done this research
But I have been told by someone who is in
a position to know that over the past 10 years–
this is the whole mining sector, not just
gold– 50% of the world’s CEOs have either
stood down or been fired, apparently.
That doesn’t surprise me.
It’s partly a function of the fact that–
I’ve spoken to many a fund manager in the
past who has torn his hair out because, as
prices have risen, there has been a perceived
laxity in management– now whether that’s
actually the case or not, I’m not really in
a position to say, because I’m not an equities
But it’s certainly the impression that I’ve
The big change actually goes back 18 years.
It goes back to 1999 when the Central Bank
Gold Agreement was put in place.
And this was designed to bring some stability
to the market.
Because over the course of the ’90s, some
central banks– and Belgium and the Netherlands
were particularly involved in this, and the
Swiss up to a point, and then the UK, which
is the government, not the Bank of England–
important, important distinction to make–
they were selling into the market, and the
market was rattled.
There was no sense of confidence as to what
was going to happen next.
So Central Bank Gold Agreement went into place,
putting a maximum quota, not a target, but
a quota on a five year basis, as to how much
the 15 signatories to the agreement, plus
the US and Japan, who stood alongside it,
would be prepared to sell into the market.
Price rose, price came down again.
But in the small print, not that small print,
there was a statement to the effect that they
would not allow the amount of lent gold in
the market to rise above where it was at the
Cue a massive short-covering rally and borrowing
activity amongst the specs in particular.
And the rate for gold for a day actually hit
40% very briefly.
That put a lot of hedge books under severe
Cambior very nearly went under and ended up
selling at a loss — selling their gold at
a loss, not the company.
And Ashanti Gold, which is now AngloGold Ashanti,
which was responsible for 30% of Ghana’s earnings–
and therefore was too big to fail, she says,
using a banking analogy– they had a very
complicated hedge book, and it took a long
time to get it unraveled.
So those two were in the headlights, if you
But there were a lot of other mining companies
who had complicated hedge books.
And the snapshot under FAS 133 for the US
reporting sector, is what it says it is.
It’s a snapshot.
It’s a quarterly position.
So a lot of institutional investors were taken
aback by this.
I think maybe they hadn’t realized quite how
complicated some hedges were.
So there was a huge move thereafter to get
the miners to simplify their hedges and to
be much more transparent.
So that’s the most important change that’s
And I know it’s 17, 18 years ago.
But it’s still key.
And what it does mean is that, while you do
see some hedging nowadays, and a lot of hedging
last year came out of Australia, it’s nowhere
near as much as it used to be.
And sometimes it will be for project finance.
In fact, more often than not, it will be.
Because the banks want to mitigate their own
Sometimes there will be some opportunistic
selling into rallies, which I personally don’t
regard as a hedge program.
I think that’s just selling forward.
But there are other hedge programs in place.
But generally, they tend to be relatively
The most complicated would be cap and collar
through the options, generally speaking.
So you mentioned there about restrictions
on lending of gold.
And that’s an important thing I want to come
Because the amount of gold lent in the market,
and the possible chain reactions– again,
you can’t go anywhere in the gold market without
touching on some conspiracy theory or another.
It’s just the nature of the beast.
And it’s part of the fun of the industry,
frankly, chewing all these things over.
But there is gold rehypothecated.
There is gold that’s held in central bank
balance sheets as a line item, which is gold
lent or– Swapped.
Actually in a swap, the title passes.
So I wanted to get a sense of that market.
Because again, if you get an event that a
lot of people hold gold for, i.e., some kind
of panic, the extent to which there is gold
lease and swapped is going to be actually
very important in determining how that ripples
back through the system.
So what’s your sense of that market, the swap
and lease market?
Lower than it was, in my impression.
Partly because of credit risk.
Central bankers are now loath to lend to anything
other than AAA.
And there aren’t very many AAAs around.
And they’ve also been lending for shorter
And quite often, when their loans have matured,
they’ve taken the gold back.
So it is a much thinner market that it used
The other element that I said I’d come back
to is the specific technical element as to
why gold is useful in a portfolio.
And there is the quantitative analysis that
we’ve mentioned already, and risk-reward,
and so on, and so forth.
But one thing that we’re often asked as analysts
is, why when there’s a crisis does the gold
Because we would expect it to rise.
It’s an insurance policy.
People buy it in anticipation of a problem
or just in case.
It’s also why people buy on inflationary expectations
or accelerating inflation.
Inflation just of itself doesn’t necessarily
But the technical reason is that the execution
period for spot trading in gold is T+2, whereas
the vast majority of equity markets are T+3
So if there’s a problem, you’ve got the cash
ahead of your margin calls.
There you go.
I had never even thought about it like that.
So just to finish off, the last I to get on
to is a look forward.
And I don’t want to base this around the price–
You and I have spoken about this off-camera.
And it’s like throwing things at a wall.
But when you take away, when you digest the
gold survey this year, and you look forward,
what do you see as the main driving factors.
And what do you think that means for supply
and demand, and by extension, price?
Do you think the price pressure is liablly
higher or potentially low?
We’re still looking at geopolitical risk as
the key driving factor.
And there’s all sorts of different elements
The election of President Trump doesn’t necessarily–
I’m not suggesting for a minute that he is
a geopolitical risk in and of himself.
But– Many would disagree with you.
I’m being diplomatic.
I can see that.
But there is uncertainty there about the way
in which foreign policy is going to be conducted.
So that, by definition, means that there is
likely to be an underlying interest in gold
on that basis.
Then you’ve got all the other things that
are happening in the Middle East, Syria, in
particular, and so forth.
So there’s still a bubbling under of political
risk there, which is likely to keep physical
investment demand maintained, both on a retail
side and a professional side.
Although at the moment, the ETF activity in
2017 is more bullish than what’s happening
on the ground, basically.
That said, we’ve already talked about the
pent up demand in India and the likely pent
up demand in China, which is probably going
to take a few months to come through, and
which won’t be enough to drive the price high.
But there will be enough to put a cushion
So if you’re looking at physical fundamentals
which are strong enough to keep the market
supported, then you start winding in everything
And on balance, with risk, the possibility
that the equity markets are overvalued and
need a correction– although on a forward
multiple basis, it’s arguable that they’re
not, but there is still some concern about
that– and if you’re looking at potential
currency volatility, then the risk, as far
as we’re concerned, is to the upside.
And just to expand that a little bit because
this idea that there are so many risks out
there– when we look at North Korea, and we
look at Trump, and we look at Russia, and
we look at China, and we look at all these
various things that people are concerned about,
the Middle East being key amongst them– a
lot of people are sitting there saying, well,
why hasn’t gold moved?
To your point, these are exactly the sort
of things that, traditionally, people expect
to put a bid under the gold price.
But it has been incredibly stable for some
Well, if we go back to the fundamentals again,
and the fact that all-in sustaining cost for
the mining industry is coming in at about
830-odd ounces or 800 and change, and the
spot price as we speak is about $1,220, that’s
a 50% margin.
Now it’s not going to be a 50% margin in total,
because there are other things to be wound
in, and so on, and so forth.
But if we talk about copper, say, and we’re
looking at the average cost of production
or the incentive price for new mines to come
on-stream, then copper wouldn’t be trading
at 50% higher than the mine production costs.
Now obviously, mine production, as we’ve already
discussed, is only a very small component
And gold is very easily mobilized, whether
it’s scrap return, or whether it’s central
bankers, or whether it’s distressed sales,
or whatever it might be.
So there’s a lot more in the market than just
mine supply, in and of itself.
But it is arguable, given those costs, that
if we didn’t have all the elements of risk
that we’re talking about, the price would
be $200 lower than it is.
So there is a chance that, should all this
stuff ease, if President Trump makes friends
with Kim Jong-un, and the Russians promise
to play nice, the price pressure could actually
be lower if this risk goes away.
A much stronger pressure lower, than there
is high, should they escalate.
And we’re actually expecting it to meander
lower over the next few months, and then,
gradually, start to turn around.
It’s another year of grinding it out, basically.
Rhona, it has been a lot of fun talking to
It has been a great pleasure.
You don’t often get a chance to talk to someone
that understands the dynamics of these markets.
Everyone has got an opinion on the price,
but not many people really understand all
the facts that go into it.
So hopefully a lot of people have got a lot
out of this.
And if it’s OK, we would love to include a
link to the report so people can– Absolutely.
–download it and pour through the– how many
pages was it, 90-odd pages?
I don’t know.
It’s a lot, but every possible number is in
I have to say that, with the exception of
proofreading the thing– and I’ve been a user
of this thing since– well, I was contributing
to it in 1981 to ’84.
And from ’84, right the way through to three
years ago when I took over running the team,
I’ve been a user of it.
And I have never once read the thing from
cover to cover.
We all use it for different reasons.
Well, we’ll see.
The analysts just want the numbers and the
local color, and then– with the way we’ve
designed it this year, there’s overall fabrication.
And then we’ve also done areas by country.
So there’s all sorts of different ways of
looking at it.
Well, anyone that wants to read it can hopefully
pick out the bits they want.
I reckon there will be a few people amongst
the audience that will read the damn thing
from cover to cover.
Rhona, thanks so much for joining me this
afternoon, such a pleasure.